The Impact of the Energy Crisis on the European Coatings Industry

Soaring energy prices have severely impacted the European coatings industry, resulting in a significant decline in production in the fourth quarter of 2022. Fortunately, the doomsday predictions from the end of last year did not come to fruition, but it is still too early to say that the storm has passed.

A study by PwC subsidiary Strategy& Consulting conducted last year showed that the surge in energy and gas prices could push Europe towards deindustrialization. Andreas Späne, the head of Strategy& Europe, commented, "In the future, many companies may decide to reorganize their production in Europe or completely exit Europe."

The biggest problems are expected to arise in energy-intensive industries such as automotive, metal, and chemical industries. Countries heavily dependent on Russian oil and gas, such as Poland, are said to be particularly hard hit. On the other hand, due to the high proportion of nuclear and renewable energy in the energy mix, production costs in France and Spain have risen relatively moderately.

Aleksandra Svidler, an economic consultant at London-based think tank Euromonitor International, said that the coatings industry is directly affected by the surge in energy prices and indirectly by the increase in costs and interruptions in the supply of raw materials.

The direct impact of the European energy crisis is particularly evident in countries heavily dependent on energy imports such as Germany and Italy. Svidler said, for example, that in Germany, which has the largest coatings industry in Europe, coatings and gloss paint manufacturers' natural gas expenditures soared by 143% and electricity costs rose by 21% between 2020 and 2022.

According to data from the German Chamber of Commerce and Industry (DIHK), last year, more than a quarter of German chemical companies were forced to cut production due to high energy prices, which added additional pressure to the costs and supply of intermediate materials for coatings manufacturers.

Due to mild weather, energy-saving measures, and strong liquefied natural gas imports, Europe's natural gas storage rate is higher than expected, which has helped significantly reduce market price pressures. According to data from the European Gas Infrastructure Association, as of April 1, 2023, when the 2022-2023 heating season officially ends, the EU's natural gas storage capacity is 55.7%, far higher than the five-year average of 34.8% for the same period. As a result, the average natural gas price in Europe fell to its lowest level since July 2021 in March 2023.

Analysts say that by 2023, the European coatings industry may face problems on the consumer side as rampant inflation forces consumers to urgently revise their budgets. To some extent, this can be seen as a consequence of last year's energy crisis, especially since the countries with the highest reported inflation data are those that were most dependent on Russian hydrocarbon imports in Eastern Europe.

For example, data from the European Union's statistics agency Eurostat shows that Hungary (25.6%), Latvia (17.2%), and the Czech Republic (16.5%) had the highest annual inflation rates among EU countries. Estonia (15.6%), Poland, and Lithuania (all 15.2%) had similar data.

Svidler said that due to the sustained squeeze on consumer purchasing power due to high price pressures, European household spending is expected to remain weak, ultimately leading to sluggish demand for coatings used in various consumer goods. According to Euromonitor International's forecast, the actual output value of the European paint and varnish industry is expected to shrink by 1.1% in 2023 due to the continued suppression of industry growth by the global economic slowdown, rising costs, and ongoing uncertainty in the energy market.

The latest results from the European Commission's monthly business survey also confirm that global and local demand for chemicals is weakening, as EU chemical producers have faced challenges from declining domestic and foreign orders over the past few months, while finished product inventories have risen significantly.

For example, over the next five years, the turnover of the European construction and automotive industries is expected to grow by 5.6% and 7.0%, respectively, supporting demand for coatings. In addition, in the medium to long term, the expected push for clean energy transformation investments will also support demand for coating solutions for renewable energy equipment, energy-efficient machinery, transportation and construction, and hydrogen infrastructure.

The energy crisis has led to rising production costs, impacting profitability, depressing business confidence, and hindering expansion plans. In addition, Svidler said that rising interest rates have added extra pressure on businesses' ability to finance capital investment projects. For example, in 2022, German paint and varnish manufacturers' construction activity and machinery spending fell by 3.5% and 1.6%, respectively, while France saw declines of 12.9% and 10.3%, respectively.